Today, field and support service organizations are being challenged to replace traditional service offerings, where technical services are provided for a fixed price, to new models where revenue is earned by delivering positive customer outcomes. The biggest problem with confronting this challenge is a short-term financial one. As the operating models are transitioned, the service organization will find itself unable to deliver on short-term financial commitments, as well as generate the investment dollars needed to enable a successful transformation. Meanwhile, customer expectations will continue to increase, and the company’s executives will impose aggressive (sometimes irrational) cost objectives on the service organization to fulfill commitments to shareholders. This scenario leads to predictable and unsatisfactory results for all. In this article, I will identify specific actions service leaders need to take now to ensure they can make the transition from being a traditional service provider to being a differentiated and highly competitive provider delivering improved customer outcomes.
How Are Services Operating Models Changing?
Service operating models in the technology space are undergoing a significant change. Companies are moving along the continuum from a pure product focus to a client- or customer-outcome–based model. The industry’s evolution to an outcome-based focus is going to have significant implications for your shareholders, your company, your service organizations, your customers or clients, and your employees. Most companies in high-tech today have long occupied level two (sell product and basic implementation and maintenance services) and are trying to move toward level three or four (sophisticated solutions that will ultimately become outcome-based service offerings). What can your organization do to address the significant financial and operational challenges involved in delivering on second-level business commitments while still earning the investment dollars required to begin the journey toward being an outcome-based provider?
The shift from level two to level three is essentially a shift from what has been a traditional capital expenditure model (up to 70% of the revenues paid up front, product assets and risks transferred to the customer’s balance sheet, and future revenues based on annual service charges) to an operating expense model (10–20% of the revenues received up front, assets and risk remain on the suppliers balance sheet, and future revenues based on outcomes delivered). The chart below illustrates the effect this transition can have on your financial plans.
With the legacy business model, service revenues dip quickly and put immense pressure on satisfying the current financial plans. Additionally, the new offerings are bringing in significantly less short-term revenues, yet cost more. This area in the middle of the “fish” is the financial challenge created by reduced or delayed revenues and the increased costs that are created in the early phases of your company’s transition to a third-level operating model.
If you’re planning to pursue a strategy that will, in the short run, cause revenue to fall and costs to rise, this could be a real problem for your company, if it, like most companies are, is concerned with satisfying Wall Street. Given that many such companies have their largest revenue streams and cost bases tied up in their service organizations, often the lion’s share of the pressure is put on the existing service leadership to take “whatever actions are necessary” to deliver short-term financial gain. Since most second-level service organizations still operate as cost centers (they may call themselves profit centers, but it is in name only), “whatever actions are necessary” is code for aggressive cost actions that may or may not pass the good sense test.
If that isn’t enough to scare off those pursuing an outcome-based model, here’s another unsettling thought to consider: most organizations tend to be overly optimistic in their initial assessments. The transformation will take longer than you think, the legacy revenue streams will go down quicker than forecasted, and costs will be higher than initially planned. If you want to survive the transformation, you need build credibility by undercommiting and overdelivering.
Squish the Fish
There is a four-pronged strategy that can be effectively executed to help service organizations manage this type of transformation. Essentially, it helps “squish the fish” by accelerating cost savings at level two, ensuring profitable revenue growth in the new operating model and shortening the time it takes to get to level three or four. This approach initially emphasizes the financial side of the equation, ensuring that the company survives and thrives in the time it takes to successfully complete the transition.
Optimize Your Current Business Model
The simplest definition of optimization is to make something as effective as possible. There are several actions you can take to optimize your current business model, but we will focus on two: channel optimization and cost optimization.
Shift Left: Channel Optimization
Since the opportunities associated with shift-left, or channel optimization, are so great, it’s recommended that you start here. Shift-left is all about moving from high-cost to low-cost service delivery channels. It’s about the effective use of remote solutions to appropriately shift service delivery from on-site to on-call and online. When this shift is made effectively, companies can deliver step-function improvements in cost and bottom-line results, while simultaneously providing a better, more personalized customer experience.
Effective channel optimization does much more than just lower costs. It allows customers to consume your services in the manner that they most desire, and it allows your organization to provide personalized customer engagements that proactively meet their needs. It’s not uncommon for effective channel optimization to result in a 10–30 percent improvement in a service organization’s cost structure!
After the Shift: Cost Optimization Within Each Channel
Once you’ve shifted left, it’s time to optimize the cost structure within each channel (this may be done simultaneously, but beware of committing to more than your team can deliver). There are many different cost optimization opportunities, but two are particularly germane to field and support service organizations: labor and parts.
In many service organizations, the largest cost is labor, and optimizing this cost is the most pressing need.
The first area of opportunity is your labor rates themselves. Of course, you need to ensure you’re providing competitive wages and benefits. But it’s amazing how many companies have allowed their basic wages and benefits to become far too expensive, such that they’re no longer competitive with the market. Many companies aren’t even benchmarking salaries to determine how they stack up against the market. In mature companies, this challenge is exacerbated by aging demographics, caused by flat to declining labor demand that is often the result of productivity improved by the effective use of new technologies and processes. The gap in wages and benefits alone often make the total cost structure noncompetitive (especially compared to younger start-ups that don’t carry the same of burden). In such cases, outsourcing and leveraging direct (full-time, part-time, or temporary) and indirect resources are viable alternatives.
Next, it’s important to ensure that the labor you have is effectively utilized. Simply put, during business hours, are they doing things your customers value and are willing to pay for? Many factors need to be considered, including effective demand and supply planning, technical proficiency, repair procedures, use of key technologies (such as knowledge management), and effective service management processes. Effective utilization is the key to success.
Finally, consider improving labor effectiveness by effectively hiring, developing, and retaining your human resources. Other areas that can positively or negatively affect labor include the use of technology in your product serviceability (i.e., the effective use of remote solutions), the quality and availability of your parts/supplies, how effectively your company manages its end-of-life processes, how well you set customer expectations surrounding the use of your solutions, and how you measure and manage labor performance.
In the end, labor optimization comes down to how effectively you manage all three areas together: rate, utilization, and effectiveness.
The next largest cost in many service organizations is the expense associated with parts and/or supplies.
To be effective, the cost of parts need to be addressed in the earliest phases of your product/solution commercialization process; this will require active participation from R&D, design, manufacturing, supply chain, sales, service, and admin. This cross-functional team will reviews the solution in the context of the entire business portfolio to ensure that short- and long-term financial and customer commitments are satisfied. It’s recommended that during the initial phase, when the solution is proposed, that parts strategies, measures, and capability assessments are included in the business case. Other areas of opportunity, as far as optimizing parts costs, include how well you negotiate with vendors on prices, terms, and conditions, whether you use new parts versus remanufactured versus on-site repair, level of parts sparing, and strategies on commonality and simplicity.
Parts usage is affected by many things: how well your company builds in reliability and serviceability, the overall quality of the part, the technical proficiency of your service personnel, as well as how effectively personnel use your repair procedures to properly diagnose a problem. As with labor cost, your knowledge management capabilities and how well you manage the variability of usage play a major role in how effectively you manage parts usage. In fact, in many organizations, implementing a more effective process surrounding parts usage at the geographic, product, manager, or individual level can result in a 5–15 percent reduction in parts costs.
The last area to assess is your company’s overall logistics and management processes. Many companies lack strong cross-functional alignment when it comes to managing their parts processes. This lack of alignment encourages siloed behavior that may optimize an individual organizations measures, but often suboptimizes results for the company’s shareholders, customers, and employees. Don’t let this happen to your company.
Tips from the Trenches
Cost optimization is a simple concept, but most organizations will never achieve it. Why? It usually comes down to a few basics.
Service frameworks: Many companies don’t maintain effective service frameworks. An effective framework includes strategy and management (charter, leadership, talent management, strategy, financial model, strong governance processes), execution (services delivery, sales, marketing, shared services), and infrastructure support (resource/asset management, service engineering, technology/tools, knowledge management, learning and development, quality management, administrative processes).
Cross-functional processes: Since service is at the end of a company’s value chain and closest to your customers, it’s very dangerous to operate in a siloed environment.
Balance: At least three forms of balance are critical: financial customer, and employee; short and long term; and people, process, and technology. Too often companies default to short-term, technology-based financial gains. Effectively aligning processes and people with technology is essential.
Undercommit and overdeliver: This is particularly important on the financial side. Selling a grandiose long-term strategy based on the benefits of an outcome-based operating model and then not delivering short-term financial gains usually opens up new leadership opportunities—don’t let this happen to you!
Good sense and experience: Both count, but are often overlooked.
Sooner or later, chances are good that your company will begin the journey toward a customer-outcome–based service model. Every journey has to start somewhere. For field and support service organizations, the first step should be optimizing the current cost structure to meet short-term financial commitments and provide the needed investment dollars to enable a successful transformation. Good luck on your journey!
Bill Steenburgh leads RTM Consulting’s Field and Support Service practices. He has extensive executive experience leading global service operations and supporting enterprise and consumer customers across all industry segments. Before joining RTM Consulting, Bill held senior and executive positions at Xerox, Xelus, Danka Corporation, and Eastman Kodak. He is a founding executive board member of TSIA, president of AFSMI, a member of SSPA, and a frequent speaker at service industry events. His lifelong commitment to services work has also earned him numerous industry awards.